Friday, March 01, 2013

If we're printing money it should go to poor people who spend not bankers who hoard.

Imagine
being asked to pay your bank for the privilege of depositing your
money in it. Most of us think that we are victims of reverse bank
robbery already. But actually give them money to take our money?
The Bank of England moved rapidly yesterday to insist that the policy
of negative interest rates, floated by bank official, Paul Tucker,
was “very blue sky thinking” and anyway wouldn't affect the
deposit rate that is paid to ordinary savers, only big banks.
Though, as we'll see, that isn't strictly true.

The
main reason the Bank of England is talking about negative interest
rates is to force the banks to lend to business. Much of that
quantitative easing money that is being printed and handed,
effectively, to the commercial banks is being redeposited with the
Bank of England. Yes, the banks get electronic money from the Bank
of England; then they deposit it back with the Bank of England to
earn interest on the cash it has printed.

You
might think that is the economics of the mad house, and you might
well be right. But in the paradoxical world of high finance, this is
considered a sound monetary policy.

It
is also an insight into how banks made their money in the first
place. Traditionally, bankers would borrow money in the morning
from the Bank of England at 3% interest, and then loan it out after
lunch to mortgage borrowers at 6%, and make it to the golf course by
4pm. What happened before the banking crisis was that the banks got
greedier and started selling CDOs and toxic mortgages after 4pm
instead of playing golf.

After
the crash, the banks were insolvent – ie bust – and we had to
bail them out with public money. Now they don't want to lend to
anyone if they can possibly avoid it – especially to businesses in
a recession. They will lend mortgages to homeowners who can afford
big deposits because the house is collateral for the loan. But
lending to businesses means actually taking a degree of risk that it
won't be paid back. Whoa! They're not going to do that, are they?

Why
bother lending it to business when you can earn interest on it with
no risk by sticking it in the Bank of England. On £1bn, even at
0.5%, the banks are making £5 million, which is not at all bad, and
will at least keep the bonus pool topped up.

So,
to recap: The Bank of England is printing money in order for banks
to deposit it back to them. Some of those bright chaps in
Threadneedle St eventually noticed that this was happening and
decided that it didn't look quite right. So they want to say to the
banks: “We will charge you for depositing your money (which is
actually our printed money) with us to encourage you to lend it to
small businesses”. This will test the credibility of the bankers'
excuse that they haven't been lending to business because there is no
demand for it. It will also lead to cheaper mortgages because banks
will have an incentive to lend more of it to home buyers. Mind you,
I wouldn't hold my breath.

The
Bank of England insists that it wouldn't directly lower interest on
ordinary people's bank savings because these negative interest rates
would only be for the banks. But this is not quite telling it
straight. The banks, awash with printed cash, are not going to be
particularly interested in getting more deposits in, so they are
likely to lower the interest rates they offer to savers. ('Lower',
you snort, since most people with savings are lucky to get any
interest at all). Secondly, the banks can impose their own sneaky
negative interest rate by upping the charges paid by depositors.
('Upping' you snort again, isn't that what they've been doing
already?).

Now,
you might ask, if all this free money is being given away, why can't
we all have some? And there are economists and bankers who have
suggested this, including Ben Bernanke the boss of the US Federal
Reserve. He once proposed dropping millions of dollars from
helicopters onto cities to encourage people to go out and buy things.
Ever since he has been referred to in financial circles as
“Helicopter Ben”. The problem he was trying to address was the
reluctance of people to spend in a recession - our old friend, the
paradox of thrift.

As
Keynes noted, if everyone saves money at the same time (as they are
inclined to do in an economic crisis) there is less cash in the
system to buy goods in the shops. Factories therefore reduce output,
shed workers, and the cycle continues. His solution was for the
government to start spending on public projects to bolster effective
demand in the economy. It's a different way of dropping money.

Yet
another way would be to give vouchers to unemployed people to buy
stuff. This has been done in countries like Japan, where in 1999 the
government distributed $6bn to the elderly and unemployed. The
problem with what we are doing now, which is stuffing the banks with
printed cash and bolstering executive bonuses, is that rich people
don't spend windfalls – they either buy expensive houses in London,
speculate on stocks, or just save it. To keep money going round the
best thing to do is give it to people who don't already have money,
because they will go out directly and buy food and clothes for their
families.

But
giving money to anyone other than bankers is thought to be morally
corrosive and a disincentive to work. It is only in the magical
world of banking that money can be invented and distributed by banks
to banks. Also, the government would have to borrow more, or print
more money to give it away. For, there is a penalty to all this
money printing, and we all know what it is: inflation.

What
the Bank of England is doing is trying to reduce government debt by
all means possible including allowing inflation to rise. Which
brings us to the punch line of this whole story. Because the truth
is, as anyone with a bank deposit knows, we already have negative
interest rates. With inflation at 3% and interest rates at 0.5% you
do the math.

7 comments:

Anonymous
said...

Great piece Iain,just about sums up everything that's wrong with the banking sector. Refinancing themselves with the quantitative easing cash and you have to wonder whether the Labour Government really thought that policy through!

I'm not convinced that the banks are actually printing the money in the process you describe. Are these not just electronic processes where ther is no hard cash printed which is where all the problems with fractional reserve rules falter. It's bad enough allowing banks to charge us interest on money that doesn't exist but now they want to confuse things more with negative???? interest rates - unbelievable! Lets forget dropping money from the sky and have some kind of debt amnesty, lets bail ourselves out for a change and re-configure the system so that people can get a decent days money for a days work. We could improve the infrastructure, housing etc reduce VAT and other punitive taxes so that the money system, backed by more people working, starts to flow through society and raises the standard of living. Vote YES lets get our constitution for the people.

About Me

Iain Macwhirter is the award-winning political columnist for the Herald and Sunday Herald. He has been a political broadcaster for over 20 years, in Westminster and Holyrood, and is former Rector of Edinburgh University.